Consider the following two bonds. One bond with a coupon rate of 6%, semi-annual coupons, and...

Consider the following two bonds. One bond with a coupon rate of 6%, semi-annual coupons, and 20 years until maturity. The second bond has 10 years until maturity but is otherwise the same. a. What is the most you should pay for each asset if current yields are 7%? b. Do the bonds sell at a premium or a discount? c. Suppose current yields increase to 8%, what are the new bond prices? d. Which bond is more sensitive to yield changes? How can you tell?

Expert Solution

a)
1.
=PV(7%/2,2*20,-6%*1000/2,-1000)=893.224638313512
2.
=PV(7%/2,2*10,-6%*1000/2,-1000)=928.937983490239

b)
The bonds sell at discount

c)
1.
=PV(8%/2,2*20,-6%*1000/2,-1000)=802.072261165735

2.
=PV(8%/2,2*10,-6%*1000/2,-1000)=864.096736550323

d)
First bond, bond with 20 years to maturity as its percentage change is higher compared to that of second bond with 10 years to maturity

jeff jeffy answered 2 years ago

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